WHEN IT COMES to investing in commodities, the first thing that comes to an investor’s mind is gold. This is largely because a lay investor did not have access to invest into any other commodities thorough investment routes like mutual fund. However, in 2021, SEBI (Securities and Exchange Board of India) approved and issued operating norms for Silver ETF (Exchange Traded Fund), whereby such MF schemes will have to invest at least 95 per cent in silver and silver-related instruments. This has opened the doors for a lay investor to take exposure to silver as well through ETF or Fund of Fund (FOF) route.
So why invest in commodities at all? The answer to this lies in the fact that commodities are generally considered as a bet against inflation as their prices are highly linked to general price levels in the economy. Apart from this, commodities also offer an investor the opportunity to diversify a portfolio given it is relatively lower correlation with equity market. Traditionally, in India, investors used gold and silver as a part of asset allocation in their portfolio. While gold could be held through a fund or ETF form, silver was largely held in physical form. Very savvy investors held silver through trade in commodity futures.
What makes silver attractive
Silver is among the preferred option globally when it comes to investing in precious metals. Historically, in times of increasing inflation, the value of silver increases and vice versa. Interest rate hikes play a role in inflation, thereby increasing attractiveness of silver while decreasing the attraction of other asset classes.
Why silver ETFs
With the introduction of norms for Silver ETFs, investors will now be able to invest in silver in a more liquid manner compared to traditional methods of investing in silver. In India, investors have been investing in Silver through Silver bars.coins/jewellery and some through silver futures. But in the physical space for silver, investors have to pay GST, which is a loss to them. As an unregistered dealer, they would not have a GST number hence they would have to pay out of pocket. Price efficiency is also likely to be better as compared to the traditional options.
A major demand source for silver metal is industrial in nature. Industrial demand for silver as a proportion of total demand has increased due to increasing application in modern environmental friendly manufacturing. Consumption of silver is highest for electronic mobility and appliances indicating increased future demand as more renewable energy and mobility solutions are adopted. The demand-supply mismatch is expected to run up the price of silver.
Ways to invest in silver
Silver is more a tactical allocation as opposed to Gold, which is more of a strategic allocation. Silver, by nature, is very bulky. Hence it is not very easy to store the metal. Today an investor can invest in silver through silver ETF. By investing in silver ETF, investors will not have to worry about its purity, theft, storage or liquidity. This has made investing in silver easier, accessible and transparent for investors, who will benefit from professional fund management.
ICICI Prudential is the first among its peers to offer silver based investment products. For investors with a demat account, they have Silver ETF and those without a demat account can invest through fund of fund. The benchmark for these offering is the rupee cost of silver as derived from the LBMA (London Bullion Market Association) AM fixing prices. The investment in these instruments start with as low as Rs 100.
At a time when almost all the asset classes have rallied and are expensive in terms of valuation, silver prices have largely been muted thus far. It is very likely that in the near future owing to developments such as reflation in different parts of the world, there could be a spike in silver prices. Investors can consider at least a 5-10 per cent allocation to silver ETFs as a part of their portfolio.
Santosh Joseph is founder and partner, Germinate Investor Services LLP.